As states step up their deregulation of the $200 billion U.S. power industry, a few energy-savvy banks are cautiously financing the sector.
In California, a pioneer of the deregulation movement, Union Bank of California in March syndicated $105 million in loans for the central system used by the state's three major power companies. BankAmerica Corp., meanwhile, has financed $300 million in construction costs.
The deals represent a breakthrough for banks looking for lending and underwriting opportunities in the U.S. power sector. But the lenders' experience shows that financing in a deregulated environment carries uncertainty and risks.
"These are bizarre entities that are being created," said Karyssa Britton, vice president of the Los Angeles-based power and utility group at Union Bank, an affiliate of Bank of Tokyo-Mitsubishi Ltd. "There a number of ways this is going to play out across the country."
Staking out the power sector are a handful of banking companies- BankAmerica Corp., Chase Manhattan Corp., Citicorp, J.P. Morgan & Co., and NationsBank Corp.-that were involved in 72% of all loans to the sector globally, according to Securities Data Co.
The U.S. power market is now offering the kinds of opportunities those banks have been seeking abroad. Syndicated lending to the global power industry reached $43.2 billion in 1997, up 85% from $23.3 billion in 1995.
But most of those deals have been overseas. Demand for electricity has grown along with the economy in Asia and Latin America. Still, international lending and the new breed of U.S. lending both require a high level of industry expertise.
For instance, when California moved to deregulate its $20 billion power market last year, legislators were at an impasse over what or who should receive tax-exempt status. They also had to decide whether to privatize the network that would be needed to distribute electricity.
In the end, the state Legislature allowed three major power companies to issue tax-exempt bonds and reduce their rates. But the lawmakers forced a new quasi-governmental organization, the Power Exchange, to get private financing.
The Power Exchange is like a New York Stock Exchange and Securities and Exchange Commission for the state's 250 power providers. Its network, the "independent system operator," directs power from companies as far away as Montana.
California's system is just one example of how states can structure deregulated power markets. The Power Exchange and its network are not-for- profit public corporations that are privately financed.
Analysts agree that the U.S. power industry is likely to emerge as a hodgepodge of networks, authorities, and companies requiring financing ranging from municipal bonds to high-yield bonds.
Lee Barrett, a senior regulatory analyst with the Edison Electric Institute in Washington, a trade group, said that some states have power pools that will make the deregulation transition easy.
"California in many ways is a unique market because an infrastructure needed to be put in place," Mr. Barrett said.
Other states will probably take different routes. Mr. Barrett said the Southwest, Southeast, Middle Atlantic states, and Midwest will form power coalitions.
California's new system suggests there will be plenty of bugs along the way. First, the Power Exchange's opening was delayed from Jan. 1 to March 31 because of computer and training problems. The snags allowed BankAmerica to increase its financing by $100 million.
Since the deregulation, the state reports that only 40,000 customers out of 9.9 million have actually changed providers. And critics of California's current system charge that it will let only 25 to 40 of the 250 initial providers survive.
That uncertainty forced Union Bank to carefully write terms with the Power Exchange and its network. Financing was structured through three instruments: a $60 million letter of credit, a $35 million liquidity facility, and $10 million in working capital.
But the real care was taken in the loan contract. The usual covenants and agreements could not be made, because "no one has done this before."
"There are just a lot of unknowns," Ms. Britton said. "Banks need to be flexible to tailor all of the documents to all of the uncertainties."